Nihal Shaikh Dev Motta May 31 2022 Is an application for initiating an insolvency process against a personal guarantor maintainable before the NCLT if no CIRP or liquidation process is pending against the corporate debtor? Clasis Law | Litigation - India Nihal Shaikh, Dev Motta Litigation FactsNCLTNCLATSupreme CourtCommentFactsThe Stress Asset Management Branch of the State Bank of India (the financial creditor) filed two separate applications under section 95(1) of the Insolvency and Bankruptcy Code 2016 (IBC) against Mahendra Jajodia and Bhanwar Jajodia – the personal guarantors of the corporate debtor (the personal guarantors) – before the Kolkata National Company Law Tribunal (NCLT).NCLTOn hearing both the applications, the NCLT rejected them on the ground that they were premature. The NCLT observed that, under section 60(2) of the IBC, in order to initiate an insolvency resolution process against a guarantor, a corporate insolvency resolution process (CIRP) or liquidation process must be pending against the principal borrower or corporate debtor. However, in the present case, on the date of the hearing, no CIRP or liquidation process was ongoing against the corporate debtor due to the approval of a resolution plan.Therefore, on 5 October 2021, the NCLT passed orders to dismiss the applications (the NCLT orders). The financial creditor filed appeals challenging the NCLT orders before the Delhi National Company Law Appellate Tribunal (NCLAT).NCLATThe NCLAT passed a joint order on 27 January 2022, allowing the appeals and remanding the applications back to the NCLT for adjudication.The NCLAT observed that section 60(1) of the IBC provides that the adjudicating authority for initiating insolvency resolution processes against corporate persons – including personal guarantors and corporate guarantors – shall be a national company law tribunal. Under section 60(2) of the IBC, where a CIRP or liquidation process against a corporate debtor is pending before a national company law tribunal, an application relating to a CIRP against a personal guarantor of the corporate debtor shall be filed before the same national company law tribunal.Further, section 60(2) is supplemental to section 60(1) as it begins with the expression "without prejudice to sub-section (1)". However, section 60(2) does not in any way prohibit the filing of proceedings under section 95 of the IBC if no proceedings are pending before a national company law tribunal. Where an application for an insolvency process against a personal guarantor does not fall under section 60(2), it shall be filled before the national company law tribunal that has territorial jurisdiction over the place where the registered office of the corporate person (ie, the corporate debtor or personal guarantor) is located, as laid down under section 60(1).Therefore, the NCLAT held that the NCLT had erred in holding that section 95(1) of IBC was not maintainable solely on the ground that no CIRP or liquidation process was not pending before the NCLT. Upon this order of NCLAT, the personal guarantors filed appeals(1) before the Supreme Court of India.Supreme Court The Supreme Court upheld the findings of the NCLAT on the ground that the NCLAT order did not warrant any interference.CommentIn light of this judgment, it is now a settled position of law that an application against personal guarantors cannot be rejected solely on the ground that there is no CIRP or liquidation proceedings pending against the corporate debtor before a national company law tribunal.For further information on this topic please contact Nihal Shaikh or Dev Motta at Clasis Law by telephone (+91 11 4213 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.Endnotes(1) Civil Appeal Nos. 1871 – 1872 of 2022.